By Wayne Henry, ContributorTHE JAMAICA Conference Board recently released the third quarter 2004 results of the Business and Consumer Confidence Surveys. Business confidence was slightly lower than it was in the second quarter, but much higher than it was in the third quarter last year 2003. On the consumer side, confidence was higher than it was in the second quarter, and in fact the highest it has been since the fourth quarter of 2002. Because the interviews of the survey were conducted before Hurricane Ivan, the Conference Board concedes that consumer sentiments may have temporarily shifted since then.
The surveys typically focus on three areas: (i) how respondents view prospects of their own financial situation, (ii) the prospects of the general economy over the near term, and (iii) the prospects of the economy over the long term. In Jamaica, the confidence surveys were first reported for the second quarter of 2002. Since then there has been considerable interest surrounding the indices.
CONSUMER CONFIDENCE
Undoubtedly, consumer confidence is one of the most closely watched indicators of future economic trends in a number of countries worldwide, including the United States, Canada, the United Kingdom, Italy, Germany, Japan and China to name but a few. The rationale underlying the use of consumer confidence as a gauge of economic activity is straightforward. In assessing the total value of goods and services produced in an economy (Gross Domestic Product or GDP), one can simply aggregate the expenditures on these items. In many economies consumer spending is the largest component of economic activity (others being investment, trade and the public sector). In the U.S. economy, consumer spending averages around 66 percent or two-thirds of Gross Domestic Product (GDP). For Jamaica the average is currently 60 percent of GDP. Changes in consumer spending will therefore typically lead to changes in overall economic activity and, given the relatively large weight of consumption in GDP, these changes can be significant.
ECONOMY
If consumers are more optimistic about the economy they will tend to spend more, particularly on durable goods and other large purchases. As consumer demand increases, firms will typically increase output to meet this demand, and in an effort to do so, will typically increase employment. Thus consumer confidence in the economy has important implications for economic performance and growth. If consumers are pessimistic about the economy, if they have an unfavourable attitude or negative expectations regarding the outlook of the economy, they tend to spend less.
However, not all subscribe to the notion of consumer confidence as a leading indicator of economic activity. Some argue that the typical consumer is limited in his ability to acquire, understand and effectively utilise information on the economy and its developments. His expectations will therefore have little information content, and may be nothing more than a 'guess' or 'hunch'. Forecasts, they argue, would better be served if surveys focused on consumers' actual intention to purchase, rather than broadly on their confidence.
Counter-arguments have been twofold. The first is that consumers may not carry around intentions to purchase far enough in advance of actual purchases to facilitate the surveys and forecasting. Second, and more significant, insofar as the consumer will act based on his expectation, then his confidence level will in fact impact economic performance, regardless of whether the consumer was uninformed or quite knowledgeable in ascertaining his confidence level. And this has overwhelmingly been the experience of a number of economies worldwide.
Consumer confidence has become a leading indicator and forecaster of economic activity. The rationale behind gauging business confidence is similar, as business spending significantly impacts the economy. Additionally, the business community has the financial incentive and motivation for being typically more informed and often more forward-looking than the average consumer. Including businesses with consumers in the confidence surveys captures the expectations of the private sector of the economy, which continues to be a driving force of economic performance and growth in the Jamaican economy.
Wayne Henry, Ph.D is a Lecturer in economics, UWI, Mona. E-mail: wayne.henry@uwimona.edu.jm
